Monday 21st May 2012
Good morning. As regular readers will know, on Mondays I like to take a retrospective look at the previous week in the currency markets, analyse what has been moving exchange rates, and look at what the Pound Sterling forecast to Euros may be going forwards.
In this week’s Report:
(For currencies other than GBP, EUR and USD, contact us for a consultation)
- Pound/Euro hits new 3.5 year high before dropping
- Bank of England warns on UK economy and EU threat
- Greek exit spooks markets
- Round up of the week’s other data that may affect rates
Sterling vs. Euro;
Last week was an exciting one for the GBP/EUR cross seeing a fresh three and a half year high which was quickly followed by a slump as sterling weakened against the single currency. There are a number of reasons for last week’s erratic market movements; below the graph is a summary of the key factors that have driven rates recently.
EU Debt/Greece worries
The troubles in Greece are well documented, the sheer uncertainty hanging over Greece and the lack of a proper government is greatly increasing the room for costly financial accidents. One in five Euros that Greek banks now lend to households or companies is propped up by the ECB. If Greece left the euro, all of that would stop and the Greek banking system would simply be unable to function.
It would be no surprise if the ECB were trying every trick in the book to get Greece to toe the line. Why? Because if things continue on their current trajectory and Greece leaves, the ECB is the only institution with even a fighting chance of seeing off a panic in countries like Portugal Spain and Ireland, and "saving" the euro. Mario Draghi does not want to be the Euro's "saviour" because that ought to be a job for governments. But nor does he want to be the one to pull the plug.
This uncertainty has weakened the Euro significantly and has helped push the GBP/EUR rate to the best in over three and a half years.
Bank of England Meeting
Towards the middle of the week Mervyn King spoke following the bank of England meeting. He was quick to stress that the Eurozone posed the greatest threat to the UK recovery, and there was a "risk of a storm heading our way from the continent”. The Eurozone was "tearing itself apart" and the UK would not be "unscathed", said Bank governor Sir Mervyn King.
Alongside King’s comments, in a fiery prime ministers questions last week Prime Minister David Cameron also spoke of the financial storm clouds across Europe, warning that Eurozone leaders must act swiftly to solve its debt crisis or face the consequences of a potential break up. It looks like a storm is coming!
This halted the rise in GBP/EUR rates and the Pound fell by around 1% against the Euro, as markets worried about the effect of the EU crisis on the UK, and the ever present threat of further QE. Indeed also on Friday, a Bank of England MPC member voiced his concerns, stating further QE could be on the cards. You can read all his comments here on the Telegraph website. QE weakens a currency due to increased supply.
Spanish Bank downgrade
Late last week Moody's Investor Service carried out a sweeping downgrade of 16 Spanish banks, including Banco Santander, the Eurozone's largest bank, citing a weak economy and the government's reduced ability to support troubled lenders. All the banks' long-term debt ratings were downgraded by at least one notch, and some suffered three-notch cuts.
Spain's banks, awash in bad loans after a real estate boom went bust, are at the heart of the Eurozone debt crisis because markets fear a state bailout would put a severe strain on the country's already stretched public finances. It looks like the contagion that has been mooted by many analysts has started touching the weaker countries in the Eurozone. This didn’t really affect GBP/EUR rates too much, due to the exposure the UK has to the banking sector.
Pound Sterling to Euro Forecasts
There are various forecasts at the moment that are quite different. With Deutsche Bank forecasting €1.16 in the coming months and Barclay's capital firm in the belief that rates will hit €1.32 within the year, it is essential to get in touch to find out your options, which can help you make the most of your currency. We will help you arm yourself with the knowledge which could assist you in getting the timing right and look at helping you take control of the market.
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Weekly Economic Data that may affect exchange rates
Monday – There are no UK releases today, and the only data of note is some construction output figures, and a speech from the US Federal Reserve.
Tuesday – The first UK data of the week is released at 09:30am including Mortgage Approvals, Consumer Price index, Housing Prices, Retail Sales and Public Sector borrowing. This will give a good barometer of the UK economy and so could affect Sterling. In the EU the only release is consumer confidence. The US has some Homes Sales and Manufacturing data in the afternoon.
Wednesday – This morning the BoE will release its minutes, showing policy discussion on its recent decision to hold interest rates and QE. The most recent news from the BoE weakened the Pound so these will be closely watched. Stateside today we will see Home Sales measures. Trade Balance figures from New Zealand are released at 11:45pm.
Thursday – Today we’ll see lots from Germany: Retail Sales, GDP figures, Inflation data and business climate assessment. As Germany is the largest EU economy expect Euro volatility. EU wide inflation measures are also released. Later in the morning we see a host of UK data including Retail Sales, GDP figures and business investment. Expect a choppy day for GBP/EUR. In the US we have Jobless Claims and Durable Goods orders.
Friday – A quiet end to the week, with only German consumer Confidence figures and a consumer sentiment survey from the United States.
Getting the best exchange rates
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Labels: Best Exchange Rates, Weekly GBP/EUR, Weeks Economic Data